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Mediating effect of capital structure in determining firms' financial performances of Indian SMEs: a structural equation modelling approach

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  • Mahuya Basu

Abstract

Small and medium scale enterprises (SMEs) constitute an important part of the Indian economy but their financial decision-making processes are substantially different from those of large corporations. In this context, the current study aims to identify the firm-specific factors that play a decisive role in determining the level of debt and financial performance of SME firms simultaneously, and to explore the mediating effect that leverage has in impacting the financial performance. The study uses a structural equation modelling approach with multiple indicators to estimate the determinants of leverage and return on equity, with leverage being treated as a mediating variable. It is found that the mediating effect of debt is significant but partial in determining the financial performances of the firms. The study also indicates that Indian SMEs are primarily risk averse and may prefer internal fund over external debt validating the 'pecking order' theory of capital structure.

Suggested Citation

  • Mahuya Basu, 2024. "Mediating effect of capital structure in determining firms' financial performances of Indian SMEs: a structural equation modelling approach," International Journal of Accounting and Finance, Inderscience Enterprises Ltd, vol. 12(1/2), pages 26-46.
    • Handle: RePEc:ids:intjaf:v:12:y:2024:i:1/2:p:26-46
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